Relationship of financial inclusion to FATF’s mandate and activities

FATF’s interest in financial inclusion is primarily driven by our objective of protecting the integrity of the global financial system. This requires covering the largest range of transactions that pose money laundering and terrorist financing risks in the countries that have committed to the FATF Recommendations.

In our new mandate for 2012 to 2020, adopted by ministers in April this year, the 8 regional bodies, the FSRB’s gained a stronger status in our organization. As associated members they are invited to take part in all parts of the FATF work. This contributes to a stronger global net-work of some 180 countries, thus being better posed to work on financial inclusions on a world-wide basis.

At the adoption of the mandate , FATF Ministers stated that financial exclusion represents a real risk to achieving effective implementation of the AML/CFT Recommendations. This formally recognizes that for FATF, financial inclusion and AML/CFT pursue mutually supportive and complementary objectives: the application of measures which enable more citizens to use formal financial services will increase the reach and the effectiveness of AML/CFT regimes.

Financial exclusion risks arise when persons have to seek their financial services from informal providers in the cash economy. From an FATF perspective, the risks include financial crimes committed by informal service providers, as well as threats to the integrity of formal financial services, as due diligence inquiries fail when money trails disappear in the cash economy.

FATF has a strong interest in financial inclusion as many of the countries that are part of its global network are considered emerging markets, developing countries, or Low Capacity Countries. In these countries where the proportion of unbanked people is still high, financial inclusion is a major challenge. At the same time, in some of these countries, AML/CFT measures are often implemented in a way that does undermine financial inclusion objectives. Local regulators and financial service providers do not take advantage of the flexibility offered by the AML/CFT Recommendations, mainly due to challenges when it comes to resources, capacity and coordination.

Our aim will be to bring countries into the “Good circle” – the Win-Win situation where more people get access to organized, regulated financial services, which also encourage economic growth, and where less people are exposed to the risks of informal and unregulated financial services.

Main FATF activities in the field of financial inclusion

FATF adopted a new set of AML/CFT Recommendations in February 2012. One of the major innovations was the introduction of the Risk-Based Approach (RBA) as a general and underlying principle of the revised AML/CFT system. This means that countries and financial institutions will be able to allocate their resources more efficiently, by focusing on higher risk areas. The formal recognition of the risk-sensitive approach to implement AML/CFT measures will be a key step for countries that wish to build a more inclusive financial system. They will be able to respond to the need of bringing the financially excluded into the formal financial sector. As they may present a lower ML/TF risk, they will benefit from the flexibility of simplified measures and process, applicable in low risk areas.

However, it is important to keep in mind that the new clients represent a very heterogeneous category with very different risk profiles in different countries. As a consequence, they cannot be classified as low risk clients on the sole basis that they are financially excluded. The flexibility to apply simplified AML/CFT measures to low risks, and low value clients, is recognized. But countries will have to take appropriate steps to assess the ML/TF risks for each category of these clients, through robust and substantiated risk assessments.

FATF also reflected the interaction between financial inclusion and financial integrity in the dedicated guidance paper that was adopted in June 2011 onAnti Money Laundering and Terrorist Financing Measures and Financial inclusion, developed in partnership with the World Bank and the Asia-Pacific Group on Money Laundering. This work came as a response to the situations where an overly strict implementation and enforcement of AML/CFT safeguards have unintended effects, and prevent the access of legitimate businesses and consumers to the formal financial system.

The document provides support to countries and their financial institutions in designing AML/CFT measures that meet the national goal of financial inclusion, without compromising the measures that exist for the purpose of combating financial crime. It develops a common understanding of the FATF Recommendations that are relevant when promoting financial inclusion -Customer Due Diligence, Internal controls, the use of agents etc. The document clarifies the flexibility offered by the Recommendations, in particular regarding the risk-based approach and measures applicable to lower risks, thus enabling countries to craft effective and appropriate controls. FATF is currently updating this Guidance to reflect the changes brought to the Recommendations, and also experiences gained. A revised version will be issued in February 2013.

FATF is also working on a set of Guidance on New Payment Methods, which will cover prepaid cards, Internet payments, and mobile payments, which have been identified as powerful tools to further financial inclusion.

Some concluding remarks

The “White paper” delivered by the GPFI onGlobal Standard-Setting Bodies and Financial Inclusion for the Poorhas served as an important inspiration for the work on these issues in FATF over the last couple of years. The priority given to these issues by the previous Mexican and Italian FATF presidents have also been important. With the strong tradition Norway has for engaging with developing countries, it will remain high on the agenda also under our Presidency.

The update of our 2011 Financial inclusion guidance paper plays a key role in this respect. We will in particular use the Risk Based Approach, which is central to the revised Recommendations, to further explore the possibilities of simplified procedures in lower risk situations.

We are also considering how financial exclusion risk factors could be part of the assessment methodology which now is being prepared for the 4th Round of evaluations which will commence late next year.

As we go along, we look forward to further inputs and observations from the GPFI and other standard setting bodies, both on high level principals and technical details, which will be the subject of the expert meeting of tomorrow.